Insurance Sector Recapitalisation: Launching into the Deep

The Global Insurance Industry maintained steady growth in 2019 as premiums increased by 3.0% to $6.3tn after crossing the $5.0tn mark in 2018, representing 7.2% of Global GDP. Growth was supported by the improvement in both life and non-life insurance segments in China and the non-life segment in advanced markets. The non-life segment printed an impressive 3.5% growth in premiums to $3.4tn in 2019 while life insurance premiums grew by 2.2% to $2.9tn. Across regions, emerging markets led the growth in premiums with China reporting 5.6% and 12.0% increase in life and non-life premiums respectively.

Declining yields on treasury instruments due to the accommodative monetary policy of global systemically important central banks pressured life insurance profitability in 2019. However, improved pricing and underwriting conditions supported the profitability of non-life insurance.

Broader fallouts from the pandemic in terms of lower demand and investment returns, deterioration in the credit quality of fixed income securities and increased mortality rates from the virus could pressure earnings, reserves, and profitability of the life insurance sector in 2020. For the non-life sector, a rise in COVID-19 related claims, premium rebates and lower interest rates could offset the increased demand for pandemic-related policies and reduce profitability.

Nigerian Insurance Sector
In the Nigerian Insurance sector, growth was faster than the country’s economic growth of 2.3%, as the sector expanded 3.6% in 2019 from 6.1% in 2018, according to the National Bureau of Statistics, indicating slowing momentum since the contraction of 2.9% in 2017. Premiums recorded a 15.5% growth to ₦365.1bn in 2017 according to available data from the Nigeria Insurers Association, with the life segment primarily responsible for the impressive growth.

The industry is undertaking another round of recapitalisation to boost capacity after two previous exercises in 2003 and 2007. However, growth remains abysmal with the sector lagging peers in major indicators – penetration and density. This poor level of growth is largely due to little awareness & understanding of insurance products, lack of trust especially with regards to claim settlement, socio-cultural & religious beliefs of Nigerians, weak enforcement of compulsory insurance policies and the slow pace of innovation amongst industry participants. In addition, the weak macroeconomic environment affects insurance adoption given weak economic growth and high unemployment and poverty rates.

To leverage the nation’s large and growing population to boost growth, it is pertinent that micro-insurance policies – which are specially designed for the low-income market, micro and small-scale enterprises– are promoted. In this regard, NAICOM recently licensed two full-fledged micro-insurance companies, GOXI and Cassava Micro-insurance companies, to offer life and general micro-insurance services in Lagos state. Alongside the promotion of micro-insurance, we believe less-restrictive Ban-assurance guidelines and the removal of the ban on partnership with Mobile Network Operators (MNOs) would allow for low-cost distribution of insurance products and deepen insurance penetration, especially at the low-income segment of the Nigerian market. We see recent developments in the form of the partnership between Axa Mansard & Carbon and agri-business insurance boosting premiums and awareness for the sector, although there are inherent risks.

The novel coronavirus is taking its toll on the Nigerian economy and the sector is not isolated from its effect. The economy is projected to experience a severe economic recession in 2020 which may subsequently result in lower disposable income for the average Nigerian and thereby, lead to poor renewal and uptake rates for insurance policies. Also, interest rates in the fixed income market are currently at low single-digits, implying lower investment income for insurers who majorly invest in the fixed income market. Overall, profitability would rely heavily on effective risk management and operational efficiency as a result of slower growth in premiums and rising claims (majorly in the life segment due to increasing death toll from the pandemic). However, the pandemic may provide an avenue for players to roll out variants of health insurance and pandemic-related policies.



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